Legal Ethics Opinion No. 1471

Zealous Representation--Trust Accounts: Disbursing Client's 
Proceeds to Creditor of Client

You have presented a hypothetical situation wherein X Corp., a
Virginia corporation, makes cash advances to plaintiffs involved
in personal injury tort actions.  As security for these advances,
including accrued finance charges and related fees, X Corp.
receives a security interest in and an assignment of proceeds of
the claim under the terms of a Security Agreement and Assignment
executed by the plaintiff prior to receiving any funds.  Receipt
of this Security Agreement and Assignment is acknowledged in
writing by plaintiff's attorney who has no pecuniary interest in
X Corp. either as an investor or lender.  

You further indicate that liens in excess of a stipulated amount
are further perfected by filing a financing statement.  The
Credit Application and Credit Agreement, both of which are also
signed by the plaintiff prior to receiving funds from X Corp.,
direct the attorney to pay X Corp. in full upon resolution of the
claim.  The Security Agreement and Assignment further contains a
provision that, in the event of any dispute between plaintiff and
X Corp., plaintiff's attorney is to hold in escrow all funds due
plaintiff, after satisfying statutory liens, pending resolution
of the dispute.

Furthermore, you indicate that, although the plaintiff's attorney
does not guarantee the repayment of the loan, nor does he make
any representation that the settlement proceeds will be
sufficient to repay the loan, X Corp. does rely on the
plaintiff's authorization to his attorney to repay the loan, on
the direction to hold disputed amounts in escrow, and on the
attorney's acknowledgment of that authorization.

Finally, in our telephone conversation of October l9, l992, you
asked that the committee assume that there is no dispute as to
the ownership of the funds or that any such dispute has been or
will be resolved presumably by judicial means.  The committee
notes also that there is no indication that the cash advances
received by plaintiff from X Corp. are to be used for expenses of
litigation.

You have asked the committee to opine whether, under the facts of
the inquiry, if the client does not deny the debt to X Corp. but
nevertheless directs the attorney, after the settlement proceeds
are received, not to pay off X Corp.'s loan but to pay the
proceeds directly to the client, it is improper for the attorney
to comply with his client's direction, or must he honor the lien
and the assignment of proceeds executed earlier by the client. 
Additionally, you have asked whether the response would differ if
the client in good faith disputes the validity or amount of the
debt to X Corp.

The appropriate and controlling disciplinary rules relative to
your inquiry are DR 9-l02(B)(4), which states that a lawyer shall
promptly pay or deliver to client or another as requested by such
person the funds, securities, or other properties in possession
of the lawyer which such person is entitled to receive; and DR
7-l02(A)(7) which prohibits a lawyer from counseling or assisting
his client in conduct that the lawyer knows to be illegal or
fraudulent. 

The committee has previously opined that it is not improper for
an attorney to persuade a finance company to agree to loan funds
to the lawyer's personal injury clients who are unable to obtain
bank loans, where the loan would become due upon resolution of
the case either by settlement or trial and where the attorney
would not guarantee, cosign, or be responsible for the loan, but
would honor a lien on the case.  LEO #ll55.  The committee has
also opined that, while it may not be improper per se for an
attorney to enter into a contract with a health care provider for
the purpose of authorizing the attorney to pay the provider's fee
from the client's recovery, the more effective solution would be
to have the client execute a release or consent form authorizing
the attorney to pay or deliver the fees owed to the provider. 
LEO #ll82.   Furthermore, Legal Ethics Opinion #421, rendered on
August l4, l98l, found that, where a personal injury client has
authorized the attorney to pay a treating physician and hospital
from settlement proceeds, it is not improper for the attorney to
notify the physician and hospital of the receipt of such
proceeds.  Finally, the committee has opined that "when an
attorney assumes the responsibility of acting as a fiduciary and
violates his or her duty in a manner that would justify
disciplinary action had the relationship been that of
attorney/client, the attorney may be properly disciplined
pursuant to the Code of Professional Responsibility".  LEO #l325.

In the facts you present, the committee is of the view that, by
virtue of having acknowledged receipt of the Security Agreement
and Assignment executed by the personal injury client, upon which
the Credit Application and Credit Agreement are based, the
attorney has accepted the fiduciary responsibility of disbursing
settlement proceeds to satisfy the loan.  The committee is of the
further opinion that, where the client subsequently directs the
attorney, after settlement proceeds are received, not to pay off
the loan but to pay the proceeds directly to the client, it would
be improper for the attorney to unilaterally arbitrate such a
money dispute between lender and borrower/personal injury client. 
In order to protect his client's interests, however, the
committee believes it is incumbent upon the attorney to counsel
his client as to liabilities which may be incurred as a result of
the client's failure to satisfy the Agreement.  See Delaware
Ethics Op. l98l-3 (April 2l, l98l).  Furthermore, although it is
beyond the committee's purview to opine as to contractual
provisions such as the Security Agreement's requirement that all
funds due plaintiff be held in escrow by the attorney, the
committee is of the opinion that it would not be improper for the
attorney to disburse the undisputed portion of the proceeds to
the borrower/personal injury client, while either holding in
escrow any disputed sums, i.e., those owed to X Corp., or
interpleading such sums to the appropriate court for
determination of the entitlement as articulated in DR
9-l02(B)(4). 

It is the committee's view that it is irrelevant to the propriety
of the attorney's actions whether the client does not deny the
debt or has a good faith dispute as to the validity or amount of
the debt to X Corp.

In addition, the committee opines that should the attorney's
release of the settlement proceeds to the client, irrespective of
the attorney's recognition of the outstanding lien held by X
Corp., amount to his knowingly assisting the client in fraud,
such conduct would be improper and violative of DR 7-l02(A)(7). 
See Cleveland Bar Ass'n Op. 87-3 (March 29, l988).

Committee Opinion
August 24, 1992